UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
- --------------------------------------------------------------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
For Quarter Ended June 30, 1998 Commission File Number 0-23702
------------- -------
STEVEN MADDEN, LTD.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3588231
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Class Outstanding as of August 6, 1998
- ------------ ---------------------------------
Common Stock 9,406,121
1
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STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance sheet ........................................ 3
Consolidated Statements of Operations ............................. 4
Consolidated Statement of Cash Flows .............................. 5
Notes to condensed consolidated
financial statements ............................................ 6
ITEM 2. Management's discussion and analysis
of financial condition and results of
operations ...................................................... 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 19
ITEM 2. Changes in Securities and Use of Proceeds ......................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 20
2
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<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,297,000 $ 3,887,000
Investments 1,991,000
Accounts receivable - nonfactored (net of allowances for doubtful accounts of
$438,000 at June 30, 1998 and $351,000 at December 31, 1997 1,095,000 1,127,000
Due from factor (net of allowances for doubtful accounts of $345,000
at June 30, 1998 and $335,000 at December 31, 1997) 6,669,000 4,821,000
Inventories 7,023,000 5,081,000
Prepaid advertising 295,000 441,000
Prepaid expenses and other current assets 2,104,000 1,698,000
Prepaid taxes 1,131,000 624,000
------------ ------------
Total current assets 22,614,000 19,670,000
------------ ------------
Property and equipment, net 6,665,000 5,931,000
------------ ------------
Other assets:
Prepaid advertising, less current portion 1,041,000 1,041,000
Deferred taxes 401,000 401,000
Deposits and other 184,000 258,000
Cost in excess of fair value of net assets acquired (net of accumulated
amortization of $228,000 at June 30, 1998 and $170,000 at
December 31, 1997) 2,536,000 1,976,000
------------ ------------
Total other assets 4,162,000 3,676,000
------------ ------------
$ 33,441,000 $ 29,277,000
============ ============
LIABILITIES
Current liabilities:
Current portion of lease payable $ 101,000 $ 105,000
Accounts payable and accrued expenses 1,801,000 2,032,000
Accrued bonuses 169,000 593,000
Other current liabilities 228,000 395,000
------------ ------------
Total current liabilities 2,299,000 3,125,000
------------ ------------
Lease payable, less current portion 328,000 359,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares authorized, 8,944,850 issued
and outstanding at June 30, 1998 and 8,429,073 issued and
outstanding at December 31, 1997 1,000 1,000
Additional paid-in capital 25,670,000 21,721,000
Unearned compensation (1,863,000) (1,281,000)
Retained earnings 7,463,000 5,809,000
Treasury stock at cost (101,800 shares) (457,000) (457,000)
------------ ------------
Total stockholders' equity 30,814,000 25,793,000
------------ ------------
$ 33,441,000 $ 29,277,000
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
3
</TABLE>
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 18,733,000 $ 12,270,000 $ 35,244,000 $ 25,488,000
Cost of sales 11,200,000 7,409,000 20,685,000 16,016,000
------------ ------------ ------------ ------------
Gross profit 7,533,000 4,861,000 14,559,000 9,472,000
Other revenue 779,000 492,000 1,543,000 854,000
Operating expenses (6,681,000) (4,749,000) (13,132,000) (9,058,000)
------------ ------------ ------------ ------------
Income from operations 1,631,000 604,000 2,970,000 1,268,000
Interest income (expense), net (46,000) (1,000) (72,000) 4,000
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,585,000 603,000 2,998,000 1,272,000
Provision for income taxes 704,000 246,000 1,244,000 514,000
------------ ------------ ------------ ------------
NET INCOME $ 881,000 $ 357,000 $ 1,654,000 $ 758,000
============ ============ ============ ============
BASIC INCOME PER SHARE $ 0.10 $ 0.04 $ 0.19 $ 0.10
============ ============ ============ ============
DILUTED INCOME PER SHARE $ 0.08 $ 0.04 $ 0.16 $ 0.09
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC INCOME PER SHARE 8,671,875 8,011,573 8,544,971 7,953,589
Effect of potential common shares 2,241,663 523,878 2,028,391 539,221
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -
DILUTED INCOME PER SHARE 10,913,538 8,535,451 10,573,362 8,492,810
============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,654,000 $ 758,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Issuance of compensatory stock options 142,000
Depreciation and amortization 628,000 364,000
Deferred compensation 74,000 72,000
Provision for bad debts 97,000 178,000
Deferred rent expense 151,000
Changes in:
Accounts receivable - nonfactored (55,000) (1,237,000)
Due from factor (1,858,000) 426,000
Inventories (1,768,000) 89,000
Prepaid expenses and other assets (186,000) 151,000
Accounts payable and accrued expenses (518,000) 287,000
Accrued bonuses (424,000) (267,000)
Other current liabilities (167,000) 58,000
Tax liability (507,000) 202,000
----------- -----------
Net cash provided by (used in) operating activities (2,737,000) 1,081,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,273,000) (1,070,000)
Sale of investment securities 1,991,000
Payments in connection with acquisition of business (19,000)
----------- -----------
Net cash provided by (used in) investing activities 699,000 (1,070,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options exercised 2,483,000 381,000
Repayment of lease obligations (35,000) (58,000)
----------- -----------
Net cash provided by financing activities 2,448,000 323,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 410,000 334,000
Cash and cash equivalents - beginning of quarter 3,887,000 6,151,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF QUARTER $ 4,297,000 $ 6,485,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of leased assets $ 359,000
Issuance of common stock for debt $ 645,000
Issuance of common stock in connection with acquisition of business $ 668,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
statements include all adjustments (consisting only of normal recurring items)
which are considered necessary for a fair presentation of the financial position
of Steven Madden, Ltd. and subsidiaries (the "Company") at June 30, 1998, and
the results of its operations, changes in stockholders' equity and cash flows
for the six and three-month periods then ended. The results of operations for
the six and three-month periods ended June 30, 1998 are not necessarily
indicative of the operating results for the full year. It is suggested that
these financial statements be read in conjunction with the financial statements
and related disclosures for the year ended December 31, 1997 included in the
Steve Madden, Ltd. Form 10-KSB.
NOTE B - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE C - NET INCOME PER SHARE OF COMMON STOCK
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share". Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported was not significant.
NOTE D - PENDING LITIGATION
[1] LEVENSON V. DIVA, ET AL. AND SISKIN V. DIVA AND STEVEN MADDEN, LTD.:
The lawsuits commenced by Yves Levenson, the former president of Diva
Acquisition Corp. ("Diva"), and by David Siskin, the former Vice
President of Design of Diva, discussed in the Company's quarterly report
on Form 10-Q for the quarter ended March 31, 1998, were consolidated into
a single lawsuit by order of the New York State Supreme Court on or about
June 24, 1998.
The Company, Diva and the Company's Chief Executive Officer filed answers
to the plaintiffs' allegations on or about June 15, 1998 and the parties
have commenced discovery which is scheduled to conclude by November 23,
1998.
The Company continues to believe that Mr. Levenson's claims and Mr.
Siskin's claims are without merit, and will continue to contest those
claims vigorously.
6
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE D - PENDING LITIGATION (CONTINUED)
[2] OOGA V. STEVEN MADDEN, LTD., ET AL.:
On or about June 30, 1998, the settlement negotiations relating to the
lawsuit commenced by Ooga Associates Corp. ("Ooga"), discussed in the
Company's quarterly report on Form 10-Q for the quarter ended March 31,
1998, were terminated. Accordingly, on July 6, 1998, the Company and
certain wholly-owned subsidiaries also named as defendants in the action,
filed a motion to dismiss four of the claims asserted in Ooga's
complaint. The sole additional defendant in the action, Stav Efrat, who
is currently an employee of the Company, filed an answer to Ooga's
compliant and also filed a third-party complaint, asserting claims
against Ooga's principal, on or about June 5, 1998.
The Company believes that Ooga's claims are without merit and intends to
contest them vigorously.
[3] DIVA V. D. AARON:
The Compliant filed by Diva in United States District Court for the
Southern District of New York and asserting federal trademark claims and
additional state law claims against D. Aaron, Inc. and six other
defendants, discussed in the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1998, was served on all of the defendants
during May and June 1998. On July 15, 1998, those defendants, including
Yves Levenson and David Siskin, filed a motion to dismiss Diva's
complaint. Diva has contested that motion, which will be fully submitted
to the Court as of August 21, 1998.
Diva intends to prosecute its claims in this action vigorously.
These actions are in the preliminary stages. Therefore, the financial
statements do not include any provision with respect to these actions.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
- --------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other unknown factors that could cause the actual
results of the Company to be materially different from the historical results or
from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
PERCENTAGE OF NET REVENUES
SIX MONTHS ENDED
JUNE 30
---------------------------------
CONSOLIDATED: 1998 1997
- ------------ ---- ----
Net Sales $35,244,000 100% $25,488,000 100%
Cost of Sales 20,685,000 59 16,016,000 63
Other Operating Income 1,543,000 4 854,000 3
Operating Expenses 13,132,000 37 9,058,000 36
Income from Operations 2,970,000 8 1,268,000 5
Interest Income (Expense) Net (72,000) 0 4,000 0
Income Before Income Taxes 2,898,000 8 1,272,000 5
Net Income 1,654,000 5 758,000 3
8
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PERCENTAGE OF NET REVENUES
SIX MONTHS ENDED
JUNE 30
------------------------------
By Segment 1998 1997
---- ----
WHOLESALE DIVISIONS:
STEVEN MADDEN, LTD.
Net Sales $22,302,000 100% $17,588,000 100%
Cost of Sales 13,790,000 62 11,211,000 64
Other Operating Income 175,000 1 39,000 0
Operating Expenses 6,840,000 31 5,856,000 33
Income from Operations 1,847,000 8 560,000 3
DIVA ACQUISITION CORP.
Net Sales $2,849,000 100% $3,034,000 100%
Cost of Sales 2,336,000 82 2,087,000 69
Operating Expenses 678,000 24 1,034,000 34
Income (Loss) from Operations (165,000) (6) (87,000) (3)
STEVEN MADDEN RETAIL INC.:
Net Sales $10,093,00 100% $3,645,000 100%
Cost of Sales 4,559,000 45 1,587,000 44
Operating Expenses 4,924,000 49 1,629,00 45
Income from Operations 610,000 6 429,000 12
ADESSO MADDEN INC.:
(FIRST COST)
Net Sales --- --- $1,221,000 ---
Cost of Sales --- --- 1,131,000 ---
Commission Revenue $1,368,000 --- 815,000 ---
Total Operating Revenue 1,368,000 100% 905,000 100%
Operating Expenses 690,000 50 539,000 60
Income from Operations 678,000 50 366,000 40
9
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PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
---------------------------------
CONSOLIDATED: 1998 1997
- ------------ ---- ----
Net Sales $18,733,000 100% $12,270,000 100%
Cost of Sales 11,200,000 60 7,409,000 60
Other Operating Income 779,000 4 492,000 4
Operating Expenses 6,681,000 36 4,749,000 39
Income from Operations 1,631,000 9 604,000 5
Interest Income (Expense) Net (46,000) 0 (1,000) 0
Income Before Income Taxes 1,585,000 8 603,000 5
Net Income 881,000 5 357,000 3
By Segment
WHOLESALE DIVISIONS:
STEVEN MADDEN, LTD.
Net Sales $12,003,000 100% $8,177,000 100%
Cost of Sales 7,615,000 63 5,156,000 63
Other Operating Income 94,000 1 24,000 0
Operating Expenses 3,254,000 27 2,965,000 36
Income from Operations 1,228,000 10 80,000 1
DIVA ACQUISITION CORP.
Net Sales $920,000 100% $1,842,000 100%
Cost of Sales 911,000 99 1,274,000 69
Operating Expenses 313,000 34 572,000 31
Income (Loss) from Operations (304,000) (33) (4,000) 0
STEVEN MADDEN RETAIL INC.:
Net Sales $5,810,000 100% $2,091,000 100%
Cost of Sales 2,674,000 46 830,000 40
Operating Expenses 2,741,000 47 935,000 45
Income from Operations 395,000 7 326,000 16
10
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PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
---------------------------------
By Segment (Continued)
ADESSO MADDEN INC.: 1998 1997
- ------------------- ---- ----
(FIRST COST)
Net Sales --- --- $160,000 ---
Cost of Sales --- --- 149,000 ---
Commission Revenue $685,000 --- 468,000 ---
Total Operating Revenue 685,000 100% 479,000 100%
Operating Expenses 373,000 54 277,000 58
Income from Operations 312,000 46 202,000 42
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997
CONSOLIDATED:
Sales for the six months ended June 30, 1998 were $35,244,000 or 38% higher than
the $25,488,000 recorded in the comparable period of 1997. The increase in sales
is due to several factors including additional wholesale accounts, increased
reorders, EDI size replenishment, increased retail sales due to the opening of
thirteen retail stores during 1997, one retail store in the first quarter of
1998, three retail stores and an outlet store in the second quarter of 1998. As
a result of additional distribution, management feels that "Steve Madden" as a
brand name has increased in popularity nationwide. In turn, increased sales have
enabled the Company to expand its advertising and in store concept efforts, all
of which have contributed to the continuing increase in sales.
Cost of sales as a percentage of sales decreased 4% from 63% in 1997 to 59% in
1998. Increased sales volume has allowed the Company to purchase in larger
volume, resulting in a lower cost per pair. Also, the purchase of a higher
percentage of shoes from overseas suppliers, resulted in a lower cost per pair
as compared to 1997. Gross profit as a percentage of sales increased 4% from 37%
in 1997 to 41% in 1998.
11
<PAGE>
Selling, general and administrative (SG&A) expenses increased by 45% to
$13,132,000 in 1998 from $9,058,000 in 1997. The increase in the first six
months of 1998 reflects the costs incurred in implementing the Company's
strategic plan to strengthen its management team and infrastructure, thereby
laying the foundation for future growth. The increase in SG&A is due primarily
to a 65% increase in payroll, bonuses and related expenses from $3,255,000 in
1997 to $5,382,000 in 1998. Additionally, the Company focused its efforts on
marketing and advertising thus increasing those expenses by 58% from $678,000 in
1997 to $1,073,000 in 1998. Also, the increase in the number of retail outlets
and expanded office facilities resulted in an increase in occupancy, telephone,
utilities, computer, legal, printing/supplies and depreciation expenses by 114%
from $1,459,000 in 1997 to $3,125,000 in 1998.
Income from operations for 1998 was $2,970,000 which represents an increase of
$1,702,000 or 134% over the income from operations of $1,268,000 in 1997. Net
income increased by 118% to $1,654,000 in 1998 from $758,000 in 1997.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $22,302,000 or 63% and $17,588,000 or 69% of total sales in 1998 and 1997,
respectively. Cost of sales as a percentage of sales has decreased by 2% from
64% in 1997 to 62% in 1998 in Madden Wholesale. Gross profit as a percentage of
sales increased 2% from 36% in 1997 to 38% in 1998. Operating expenses increased
by 17%, from $5,856,000 in 1997 to $6,840,000 in 1998. This increase is due to
an increase in payroll and payroll related expenses principally due to the
hiring of additional management personnel and an increase in occupancy expenses
due to additional warehouse space needed for expanding EDI size replenishment
inventory. Operating expenses have also increased due to the development of a
new line of sneakers and the hiring of additional personnel to facilitate future
growth of footwear classifications/extensions. Wholesale income from operations
for the six month period ended June 30, 1998 was $1,847,000 compared to income
from operations of $560,000 for the six month period ended June 30, 1997.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $2,849,000
or 8%, and $3,034,000 or 12%, of total sales in 1998 and 1997, respectively. The
Company believes that the decrease in sales is primarily due to the introduction
of a new management team in the first quarter of 1998 for Diva and the
implementation of certain modifications to Diva's business which the Company
expects will enhance operations in the future. Cost of sales as a percentage of
sales has increased by 13% from 69% in 1997 to 82% in Diva Wholesale, primarily
as a result of a higher markdowns experienced in the second quarter of 1998.
Gross profit as a percentage of sales decreased from 31% in 1997 to 18% in 1998
due to the same reason mentioned above. Operating expenses decreased by 34% from
$1,034,000 in 1997 to $678,000 in 1998 due to decreases in administrative
payroll, selling and designing expenses. Loss from operations from Diva was
$165,000 in 1998 compared to a loss of $87,000 in 1997.
12
<PAGE>
RETAIL DIVISION:
Sales from the Retail Division accounted for $10,093,000 or 29% and $3,645,000
or 14% of total revenues in 1998 and 1997, respectively. The comparable stores
sales for the first six months increased 9% over the same period of 1997. The
increase in Retail Division sales is primarily due to the Company's opening of
retail stores in Queens Center Mall in Elmhurst, NY and Lenox Square Mall in
Atlanta, GA, in the second quarter of 1997, Willowbrook Mall in Wayne, NJ;
Cherry Hill Mall in Cherry Hill, NJ; Staten Island Mall in Staten Island, NY;
Glendale Galeria in Glendale, CA and Montgomery Mall in Bethesda MD, in the
third quarter of 1997, Southshore Plaza in Braintree, MA; David Aaron in New
York, NY; Smithhaven Mall in Lakegrove, NY; Coconut Grove Mall in Coconut Grove,
FL; Broward Mall in Plantation, FL; Valleyfair Shopping Center in Santa Clara,
CA, in the fourth quarter of 1997, Aventura Mall in Aventura, FL, in the first
quarter of 1998, Brea Mall in Brea, CA; Westside Pavilon in Los Angeles, CA;
South Coast Plaza Mall in Costa Mesa, CA and the Company also opened an outlet
store in Mineola, NY all of which generated aggregate sales of $6,116,000. Gross
profit as a percentage of sales has decreased by 1% from 56% in 1997 to 55% in
1998. Selling, general and administrative expenses for the Retail Division
increased to $4,924,000 or 49% of sales in 1998 from $1,629,000 or 45% of sales
in 1997. This increase is due to increases in payroll and related expenses,
occupancy, printing, computer and depreciation expenses as a result of opening
thirteen additional stores in 1997, one additional store in first quarter of
1998 and the addition of a retail warehouse at 43-15 38th Street, Long Island
City, NY. Income from operations from the retail division was $610,000 in 1998
compared to income from operations of $429,000 in 1997.
OTHER:
Adesso-Madden, a wholly owned subsidiary of the Company, generated commission
revenues of $1,368,000 for the first six months of 1998 which represents an
increase of $463,000 or 51% over the commission revenues of $905,000 in 1997 due
to additional accounts. Operating expenses increased by 28% from $539,000 in
1997 to $690,000 in 1998 due to increases in selling and commission, payroll and
payroll related expenses, and telephone expenses. Income from operations from
Adesso-Madden was $678,000 in 1998 compared to an income of $366,000 in 1997.
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1997
CONSOLIDATED:
Sales for the three months ended June 30, 1998 were $18,733,000 or 53% higher
than the $12,270,000 recorded in the comparable period of 1997. The increase in
sales is due to several factors including additional wholesale accounts,
increased reorders, EDI size replenishment, increased retail sales due to the
opening of thirteen retail stores during 1997, one retail store in the first
quarter of 1998, three retail stores and an outlet store in the
13
<PAGE>
second quarter of 1998. As a result of additional distribution, management feels
that "Steve Madden" as a brand name has increased in popularity nationwide. In
turn, increased sales have enabled the Company to expand its advertising and in
store concept efforts, all of which have contributed to the continuing increase
in sales. Cost of sales and Gross profit approximately remains the same as a
percentage of sales, primarily as a result of higher markdowns experienced in
the second quarter of 1998.
Selling, general and administrative (SG&A) expenses increased by 41% to
$6,681,000 in 1998 from $4,749,000 in 1997. The increase in the second quarter
of 1998 reflects the costs incurred in implementing the Company's strategic plan
to strengthen its management team and infrastructure, thereby laying the
foundation for future growth. The increase in SG&A is due primarily to a 66%
increase in payroll, bonuses and related expenses from $1,747,000 in 1997 to
$2,907,000 in 1998. Also, the increase in the number of retail outlets and
expanded office facilities resulted in an increase in occupancy, telephone,
utilities, legal, stock related, printing/supplies and depreciation expenses by
115% from $843,000 in 1997 to $1,813,000 in 1998.
Income from operations for 1998 was $1,631,000 which represents an increase of
$1,027,000 or 170% over the income from operations of $604,000 in 1997. Net
income increased by 147% to $881,000 in 1998 from $357,000 in 1997.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $12,003,000 or 64% and $8,177,000 or 67% of total sales in 1998 and 1997,
respectively. Cost of sales and gross profit remains the same as a percentage of
sales in 1998 over same period of 1997 in Madden Wholesale. Operating expenses
increased by 10%, from $2,965,000 in 1997 to $3,254,000 in 1998. This increase
is due to an increase in payroll and payroll related expenses principally due to
the hiring of additional management personnel and an increase in occupancy
expenses due to additional warehouse space needed for expanding EDI size
replenishment inventory. Operating expenses have also increased due to the
development of a new line of sneakers and the hiring of additional personnel to
facilitate future growth of footwear classifications/extensions. Wholesale
income from operations for the three month period ended June 30, 1998 was
$1,228,000 compared to income from operations of $80,000 for the three month
period ended June 30, 1997.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $920,000 or
5%, and $1,842,000 or 15%, of total sales in 1998 and 1997, respectively. The
Company believes that the decrease in sales is primarily due to the introduction
of a new management team in the first quarter of 1998 for Diva and the
implementation of certain modifications to Diva's business which the Company
expects will enhance operations in the future. Cost of sales as a percentage of
sales has increased by 30% from 69% in 1997 to 99% in Diva Wholesale, primarily
as a result of a higher markdowns experienced in second quarter. Gross profit as
a percentage of sales decreased from 31% in 1997 to 1% in 1998 due the same
reason
14
<PAGE>
mentioned above. Operating expenses decreased by 45% from $572,000 in 1997 to
$313,000 in 1998 due to decreases in administrative payroll, selling and
designing expenses. Loss from operations from Diva was $304,000 in 1998 compared
to a loss of $4,000 in 1997.
RETAIL DIVISION:
Sales from the Retail Division accounted for $5,810,000 or 31% and $2,091,000 or
17% of total revenues in 1998 and 1997, respectively. The comparable stores
sales for the three month period ended June 30, 1998 increased 15% over the same
period of 1997. The increase in Retail Division sales is primarily due to the
Company's opening of retail stores in Queens Center Mall in Elmhurst, NY and
Lenox Square Mall in Atlanta, GA, in the second quarter of 1997, Willowbrook
Mall in Wayne, NJ; Cherry Hill Mall in Cherry Hill, NJ; Staten Island Mall in
Staten Island, NY; Glendale Galeria in Glendale, CA and Montgomery Mall in
Bethesda MD, in the third quarter of 1997, Southshore Plaza in Braintree, MA;
David Aaron in New York, NY; Smithhaven Mall in Lakegrove, NY; Coconut Grove
Mall in Coconut Grove, FL; Broward Mall in Plantation, FL; Valleyfair Shopping
Center in Santa Clara, CA, in the fourth quarter of 1997, Aventura Mall in
Aventura, FL, in the first quarter of 1998, Brea Mall in Brea, CA; Westside
Pavilon in Los Angeles, CA; South Coast Plaza Mall in Costa Mesa, CA and the
Company also opened an outlet store in Mineola, NY all of which generated
aggregate sales of $3,413,000. Gross profit as a percentage of sales has
decreased by 6% from 60% in 1997 to 54% in 1998. Selling, general and
administrative expenses for the Retail Division increased to $2,741,000 or 47%
of sales in 1998 from $935,000 or 45% of sales in 1997. This increase is due to
increases in payroll and related expenses, occupancy, printing, computer and
depreciation expenses as a result of opening thirteen additional stores in 1997,
one additional store in first quarter of 1998, three additional stores and one
an outlet store in second quarter of 1998, and the addition of a retail
warehouse at 43-15 38th Street, Long Island City, NY. Income from operations
from the retail division was $395,000 in 1998 compared to income from operations
of $326,000 in 1997.
OTHER:
Adesso-Madden, a wholly owned subsidiary of the Company, generated commission
revenues of $685,000 for the three month period ended June 30, 1998 which
represents an increase of $206,000 or 43% over the commission revenues of
$479,000 in 1997 due to sales from additional accounts. Operating expenses
increased by 35% from $277,000 in 1997 to $373,000 in 1998 due to increases in
selling and commission, payroll and payroll related expenses, and telephone
expenses. Income from operations from Adesso-Madden was $312,000 in 1998
compared to an income of $202,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has working capital of $20,315,000 at June 30, 1998 which represents
an increase of $5,356,000 in working capital from June 30, 1997.
15
<PAGE>
In November 1997, Steven Madden, Ltd., engaged Hambrecht & Quist, LLC as its
exclusive placement agent in connection with a potential private placement of
its securities. A private placement of the Company's securities was not
consummated and, in May 1998, the Company terminated the engagement of Hambercht
& Quist.
As of July 9, 1998, the Board of Directors of the Company approved the
redemption of all of the Company's outstanding Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants). Warrantholders have until the close
of business on August 13, 1998 to exercise their Class B warrants for the
purchase of shares of Common Stock at an exercise price of $5.50 per share.
Should a warrantholder fail to exercise the Class B Warrants held thereby by
such date, the Company will redeem them on August 14, 1998 by paying $.05 for
each outstanding Class B Warrant. If all of the Class B Warrants are exercised,
the Company anticipates receiving a total of approximately $10,000,000. During
July 1998 the Company received approximately $1,805,000 from the exercise of
Class B Warrants.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Presently, the Company sells approximately
fifty percent (50%) of its products to department stores, including Federated
Department Stores (Bloomingdales, Burdines, Macy's East, Macy's West and Rich's)
May Department Stores, Dillards, Nordstorm's, Dayton Hudson and approximately
fifty percent (50%) to specialty stores, including shoe stores such as Edison
(Wild Pair, Bakers/Leeds) and junior clothing stores such as Urban Outfitters.
Federated Department Stores presently accounts for approximately 16% of the
Company's sales.
OPERATING ACTIVITIES
During the six month period ended June 30, 1998, cash used by operating
activities was $2,737,000. Uses of cash arose principally from an increase in
accounts receivable factored of $1,858,000, an increase in inventories of
$1,768,000, an increase in prepaid expenses and other assets of $186,000, a
decrease in accounts payable and accrued expenses of $518,000, a decrease in
accrued bonuses of $424,000 and an increase in prepaid taxes of $507,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2009. Future obligations under these lease
agreements total $20,324,000.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,145,000, subject to annual
bonuses and annual increases as may be determined by the Company's Board of
Directors. In addition, as part of the employment agreements, the Company is
committed to pay incentive bonuses based on income before interest and taxes to
the officers.
The Company continues to increase its supply of products from foreign
manufacturers, the majority of which are located in Brazil and Mexico. Although
the Company has not entered into long-term manufacturing contracts with any of
these foreign companies, the Company
16
<PAGE>
believes that a sufficient number of alternative sources exist outside of the
United States for the manufacture of its products if current suppliers need to
be replaced. In addition, because the Company deals with U.S. currency for all
transactions and intends to continue to do so, the Company believes there should
be no foreign exchange considerations.
INVESTING ACTIVITIES
During the six month period ended June 30, 1998, the Company used cash of
$1,273,000 to acquire computer equipment and make leasehold improvements on new
retail stores, warehouse space and office space. The Company also sold
investment securities resulting in proceeds of $1,991,000.
FINANCING ACTIVITIES
During the six month period ended June 30, 1998, the Company received $2,483,000
from the exercise of options and warrants. In addition, during July 1998 the
Company received approximately $1,805,000 from the exercise of Class B Warrants.
LICENSE AGREEMENTS
During the second quarter of 1997, the Company entered into three license
agreements for hosiery, jewelry and ready-to-wear, bringing the total number of
license agreements to six, including three license agreements entered into
during the year ended December 31, 1997 for handbags, sunglasses and outerwear.
The Company added its seventh license, Van Mar, Inc. for Steve Madden intimates
which contract commenced on April 1, 1998 and the Company also extended its
agreement with CO International to include hair accessories in Canada due to
requests from customers. The Company is exploring additional licensing
opportunities.
On April 21, 1998 the Company signed a License Agreement R.S.V. Sport, Inc.,
pursuant to which the Company has the right to use the l.e.i. trademark in
connection with the sale of women and girls footwear. R.S.V. Sport, Inc., is a
$130 million jeanswear company and is among the most popular jean brands for
young women ages 12 to 20. This provides the Company with the opportunity to
market shoes to a different customer base than those customers presently
targeted by the Steve Madden brand. The line will be offered at lower retail
prices than the Steve Madden brand.
YEAR 2000
The Company recognizes that a challenging problem exits in that many computer
systems worldwide do not have the capability of recognizing the year 2000 or the
years thereafter. No easy technological "quick fix" has yet been developed for
this problem. The Company is expending approximately $200,000 to assure that its
computer systems are reprogrammed in time to effectively deal with transactions
in the year 2000 and beyond. This "year 2000 Computer Problem" creates risk for
the Company from unforeseen problems in its own
17
<PAGE>
computer systems and from third parties with whom the Company deals. Such
failures of the Company and/or third parties' computer systems could have a
material adverse effect on the Company and its business in the future.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
18
<PAGE>
PART II
ITEM 1.
LEGAL PROCEEDINGS
LEVENSON v. DIVA, et. al.
SISKIN v. DIVA and STEVEN MADDEN, LTD.
- --------------------------------------
The lawsuits commenced by Yves Levenson, the former president of Diva
Acquisition Corp. ("Diva"), and by David Siskin, the former Vice President of
Design, discussed in the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1998, were consolidated into a single lawsuit by order of the
New York State Supreme Court on or about June 24, 1998.
The Company, Diva and the Company's Chief Executive Officer filed answers to the
plaintiffs' allegations on or about June 15, 1998 and the parties have commenced
discovery, which is scheduled to conclude by November 23, 1998.
The Company continues to believe that Mr. Levenson's claims and Mr. Siskin's
claims are without merit, and will continue to contest those claims vigorously.
OOGA v. STEVEN MADDEN, LTD., et. al.
- ------------------------------------
On or about June 30, 1998, the settlement negotiations relating to the lawsuit
commenced by Ooga Associates Corp. ("Ooga"), discussed in the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1998, were
terminated. Accordingly, on July 06, 1998, the Company and certain wholly-owned
subsidiaries also named as defendants in the action, filed a motion to dismiss
four of the claims asserted in Ooga's complaint. The sole additional defendant
in the action, Stav Efrat, who is currently an employee of the Company, filed an
answer to Ooga's complaint and also filed a third-party complaint, asserting
claims against Ooga's principal, on or about June 05, 1998.
The Company believes that Ooga's claims are without merit and intends to contest
them vigorously.
DIVA v.d. AARON
- ---------------
The Complaint filed by Diva in United States District Court for the Southern
District of New York and asserting federal trademark claims and additional state
law claims against D. Aaron, Inc. and six other defendants, discussed in the
Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998,
was served on all of the defendants during May and June, 1998. On July 15, 1998,
those defendants, including Yves Levenson and David Siskin, filed a motion to
dismiss Diva's complaint. Diva has contested that motion, which will be fully
submitted to the Court as of August 21, 1998.
19
<PAGE>
Diva intends to prosecute its claims in this action vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of May 1, 1998, the Company's wholly owned subsidiary, Shoe Biz, Inc.,
formerly known as Steven Madden Outlets, Inc., acquired certain assets and
assumed certain liabilities of Daniel Scott, Inc., a footwear retailer. In
exchange for the assets, the Company issued 64,520 shares of its Common Stock
which shares were issued pursuant to Section 4(2) of the Securities Act of 1933.
Subsequently, the Company filed with the Securities and Exchange Commission a
registration statement on Form S-3 covering such shares. On July 27, 1998, the
registration statement was declared effective by the Commission.
As of July 9, 1998, the Board of Directors of the Company approved the
redemption of all of the Company's outstanding Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants). A Notice of Redemption was mailed to
all Class B Warrantholders to advise them under the terms of the Warrant
Agreement between the Company and the American Stock Transfer and Trust Company,
as warrant agent, the Company was exercising its right to redeem and cancel all
of the Company's Class B Warrants. Accordingly, warrantholders have until the
close of business on August 13, 1998 to exercise their Class B warrants for the
purchase of shares of Common Stock at an exercise price of $5.50 per share.
Should a warrantholder fail to exercise the Class B Warrants held thereby by
such date, the Company will redeem them on August 14, 1998 by paying $.05 for
each outstanding Class B Warrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 22, 1998, the Company held its Annual Meeting of Stockholders where the
stockholders of the Company approved the following proposals.
(a) ELECTION OF DIRECTORS. The following Directors were reelected for a term of
one (1) year to the Board of Directors of the Company: (i) Rhonda Brown
(8,312,614 votes for, 87,900 withheld),; (ii) Steven Madden (8,312,614
votes for, 87,900 vote withheld); Arvind Dharia (8,312,614 votes for,
87,900 votes withheld); (iv) John Basile (8,312,614 votes for, 87,900 votes
withheld); (v) John L. Madden (8,312,314 votes for, 88,200 votes withheld),
(vi) Peter Migliorini (8,312,314 votes for, 88,200 votes withheld); and
(vii) Les Wagner (8,312,314 votes for, 88,200 votes withheld).
(b) 1998 STOCK PLAN. The Company's 1998 Stock Plan covering 1,000,000 shares of
Common Stock was approved by the stockholders of the Company (5,019,729
votes for, 908,440 votes against, 59,100 votes withheld). As of August 6,
1998, 300,000 options have been issued by the Company under the 1998 Stock
Plan.
(c) REINCORPORATION IN THE STATE OF DELAWARE. In order to effect a
reincorporation of the Company in the State of Delaware, a merger of the
Company with and into a wholly-
20
<PAGE>
owned Delaware subsidiary was approved by the stockholders of the Company
(5,838,060 votes for, 121,209 votes against, and 29,500 votes withheld).
(d) APPOINTMENT OF AUDITORS. The appointment of Richard A. Eisner & Company,
LLP, as independent auditors of the Company, for fiscal year 1998 was
approved by the stockholders of the Company (7,603,549 votes for, 777,390
votes against, and 19,575 votes withheld).
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
STEVEN MADDEN, LTD.
/s/ ARVIND DHARIA
----------------------------
Arvind Dharia
Chief Financial Officer
DATE: August 11, 1998
22
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